Huge Pens Venture Capitalisthttp://www.highpeaks.vc
Mon, 29 Feb 2016 18:19:47 +0000en-UShourly1https://wordpress.org/?v=4.5.13Why Venture Capitalists Opt Not to Invest in Certain Startupshttp://www.highpeaks.vc/why-venture-capitalists-opt-not-to-invest-in-certain-startups/
Mon, 29 Feb 2016 18:19:47 +0000http://www.highpeaks.vc/?p=15We often come across situations where venture capitalists opt not to invest in certain startups. As a matter of fact, a good number of startups that apply for venture capital financing end up being rejected. I once came across statics alluding to the fact that only a (very) small percentage of the startups that apply for venture capital actually end up getting it. Against that background, it is critical for you, as an entrepreneur who is interested in venture capital financing, to understand the real reasons as to why the venture capitalists opt not to invest in certain startups. That way, you’d be better placed to avoid the mistakes that other entrepreneurs make: mistakes that ultimately result in them missing out on venture capital financing.

Firstly, we have situations where venture capitalists opt not to invest in certain startups because the startups’ business ideas don’t make sense. Thus, as the entrepreneur seeking to get venture capitalists to invest in your business, it is critical for you to ensure that the manner in which you explain your business idea makes sense, even to the conservative old-school minds who run most of these venture capital firms.

Secondly, we have situations where venture capitalists opt not to invest in certain startups because the amounts of money required for investment in the startups are simply too huge (or simply too small). You have to understand that most venture capital firms have floors and ceilings (minimums and maximums) in terms of the sums of money they are willing to invest in a single venture. If your capital requirements are too low, the venture capitalists are likely to advise you to instead explore other potential sources of business finance: such as bank loans. And if your capital requirements are too huge, the venture capitalists are, well, simply likely to tell you that they can’t finance you. Venture capitalists fear investing too much in any given business: which makes sense, seeing that they normally invest in startups, whose risk profiles are usually not so good.

Thirdly, we have situations where venture capitalists opt not to invest in certain startups because they don’t see the potential for growth in the startups. The startups’ business ideas may make sense, but if it so happens that the startups’ businesses are not scalable (that is, expandable on a grand scale), then the venture capitalists opt not to invest in the said startups.

]]>Selecting an Ideal Startup to Invest Inhttp://www.highpeaks.vc/selecting-an-ideal-startup-to-invest-in/
Mon, 29 Feb 2016 18:17:22 +0000http://www.highpeaks.vc/?p=9One challenge that venture capitalists have to grapple with on a day to day basis is that of selecting ideal startups to invest in. This is a huge challenge: especially keeping in mind the fact that the money that venture capitalists have to invest is (in most cases) not their own money. On the contrary, the money that venture capitalists have to invest is other people’s money. Therefore the people who run venture capital firms have to exercise due diligence in selecting the startups to invest in. That is something they have to do while keeping in mind the fact that they are (in most cases) dealing with other people’s money, which they can’t afford to be careless with.

In my experience, three key factors guide the process of selecting an ideal startup to invest in.

The first factor that guides the process of selecting an ideal startup to invest in is the soundness of the startup’s business idea. To this end, the venture capitalists look at a startup’s business plan, and then they apply their experience and common-sense, to figure out whether or not the startup’s business plan makes sense.

The second factor that guides the process of selecting an ideal startup to invest in is the consideration as to whether the startup has potential to grow in the future. This is a question of scalability: and as a general rule, venture capitalists tend to show interest in enterprises that have real potential to grow into huge businesses in the future.

The third factor that guides the process of selecting an ideal startup to invest in is the consideration as to whether the startup has demonstrated ‘proof of concept’. If, for instance, the startup in question is involved in the manufacture of a certain product, the question would be as to whether it has been able to come up with prototypes of the product — and actually gotten people to buy the prototypes. The level of due diligence required here is akin to that which the US Postal Service uses when recruiting people through its www.usps.com/employment portal: where it requires some basic level of assurance that the people can do the work, before hiring them. It is in a similar manner that venture capitalists need (tangible) proof of any given startup’s product concept, before proceeding to invest in it.

]]>The Pros and Cons of Inviting Venture Capitalists Into Your Startuphttp://www.highpeaks.vc/the-pros-and-cons-of-inviting-venture-capitalists-into-your-startup/
Mon, 29 Feb 2016 18:13:49 +0000http://www.highpeaks.vc/?p=11As an entrepreneur trying to set up a new business startup, a point is likely to come where you will have to make a decision on whether or not to invite venture capitalists into the startup. This is likely to be at the point where you realize that you simply don’t have enough money to finance the startup’s further growth. At that point, you have to start thinking about inviting investors with deeper pockets: among them the venture capitalists. When you get to this point, you need to understand that there are pros and cons to inviting venture capitalists into your startup. You therefore need to objectively assess the pros against the cons, in order to make the right decision on whether or not to invite the venture capitalists into the startup.

Starting with the pros, you will see that the venture capitalists do indeed have the capacity to give you all the money you need to grow the startup to the next level. This is money that you’d struggle a great deal for, if you were to attempt to raise it through the other methods — say, by bootstrapping or borrowing from banks. Furthermore, the venture capitalists usually go beyond just providing money: and they also provide you with the expertise you need to turn the startup into a successful business enterprise. Further still, the fact that you are able to attract venture capitalists to invest in your business is likely to be viewed by other stakeholders as a sign that your business is going in the right direction: which is likely to lead to even more success.

Turning to the cons, you will see that when you invite venture capitalists into your business, you will have to be willing to cede some control (over the business) to them. A point is actually likely to come where you find yourself being controlled by the venture capitalists who have invested in your business: to the point where you are in essence nothing more than some sort of an employee to them. Furthermore, you have to understand that the venture capitalists (who are sometimes referred to as ‘vulture capitalists’) tend to take very huge stakes in startups, in exchange for relatively small investments.

When all is said and done, there is give and take, when it comes to inviting venture capitalists into your startup. It is upon you to carry out an objective cost-benefit analysis, in order to make the decision on whether or not to invite the venture capitalists.